Strike, expiry and premium
Three numbers define every option contract. Change any one and you have a different thing entirely.
Every option, of every kind, anywhere, is described by the same three numbers plus a direction.
1. The strike price
The price you are allowed to trade at. For a call, the price you may buy at. For a put, the price you may sell at.
A call with a lower strike is more valuable — being allowed to buy at $90 is better than being allowed to buy at $110. A put with a higher strike is more valuable, for the mirror reason.
2. The expiry date
The day the right dies. After it, the contract is void and worthless, whatever happens afterwards.
An option with six months left is worth more than an identical one with one week left, because more can happen. Time has value here, and unlike the strike it is being consumed every single day.
3. The premium
What the option costs. It is not set by anyone in authority — it is a market price, produced by buyers and sellers the same way a share price is.
What moves the premium
| If this rises… | …a call gets | …a put gets |
|---|---|---|
| The price of the share | More expensive | Cheaper |
| Time left to expiry | More expensive | More expensive |
| Expected volatility | More expensive | More expensive |
| The strike price | Cheaper | More expensive |
It seems odd that the same change makes a bet on “up” and a bet on “down” both dearer. But an option's payoff is lopsided — unlimited one way, capped at the premium the other — so a wider range of possible outcomes is genuinely worth more to whoever holds it, regardless of direction.
One contract, one hundred shares
In US markets a single option contract almost always covers 100 shares. So a premium quoted as $3 costs $300 for one contract. This trips up nearly everyone once.